1986 (3) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest earned from bank deposits during factory construction.
2. Deductibility of interest paid on loans borrowed for factory construction.
3. Allowability of expenditure on extraction of minerals as business expenditure.
4. Levy of interest under section 217 of the Income-tax Act.

Detailed Analysis:

Issue 1: Taxability of Interest Earned from Bank Deposits During Factory Construction
The primary issue is whether the interest earned from bank deposits during the construction of the factory should be assessed under the head 'Income from other sources'. The Tribunal had previously ruled in favor of the assessee, stating that such interest should reduce the cost of construction rather than be treated as income. However, recent decisions from the Madras High Court in CIT v. Seshasayee Paper & Boards Ltd. and the Karnataka High Court in Karnataka Forest Plantations Corpn. Ltd. have held that interest earned during the construction phase is assessable as income from other sources. Consequently, the Tribunal, respecting these High Court decisions, upheld the order of the Commissioner (Appeals) that the interest earned on deposits is rightly assessed as income from other sources.

Issue 2: Deductibility of Interest Paid on Loans Borrowed for Factory Construction
The second issue is whether the interest paid on loans borrowed for the purpose of constructing the factory is allowable as a deduction. The Tribunal had earlier allowed such deductions, but following the recent High Court rulings, it concluded that the borrowal was not for earning income but for construction. Therefore, the interest paid on borrowed monies does not fall within the ambit of section 57(1)(iii) of the Income-tax Act, 1961, and is not deductible.

Issue 3: Allowability of Expenditure on Extraction of Minerals as Business Expenditure
The third issue concerns the allowability of Rs. 2,84,157 and Rs. 36,342 as business expenditure. The assessee argued that the extraction of minerals, which are basic raw materials for cement manufacturing, is an independent activity and should be considered as business expenditure. The Tribunal referred to the Gujarat High Court decision in CIT v. Saurashtra Cement & Chemical Industries Ltd., which held that the extraction of lime stone constitutes the commencement of business. The Tribunal agreed that the extraction activity is an integral part of the business and allowed the expenditure as business expenditure. Additionally, Rs. 36,342 was allowed under section 35E of the Act as it related to expenditure on prospecting for certain minerals.

Issue 4: Levy of Interest under Section 217 of the Income-tax Act
The final issue is the levy of interest under section 217 of the Act. The Tribunal directed the Income Tax Officer (ITO) to recalculate the interest after giving effect to the Tribunal's order on the above issues.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the assessment of interest earned from bank deposits as income from other sources and disallowed the deduction of interest paid on borrowings for factory construction. However, it allowed the expenditure on mineral extraction as business expenditure and directed the recalculation of interest under section 217.